Colorado Lawmakers Set Stage for Equity Crowdfunding

Colorado stands poised to become the latest state to allow residents who do not meet the stringent SEC standards for accredited investors to invest small amounts in companies located within its borders.

State lawmakers on Tuesday introduced “the Colorado Crowdfunding Act.” The bill, officially HB15-1246, would allow businesses to use websites to attract investors and sell equity. Like in other states, a Colorado company could only sell securities to investors who live in the state, and the state securities commissioner would set and enforce regulations.

The bill is being pitched as a way to allow startups and small businesses to raise money from people who previously could not invest because of SEC rules that require investors in private companies to have a net worth of more than $1 million or annual income greater than $200,000 in each of the past two years.

As of November, 13 states had laws allowing equity crowdfunding. Like those states, the Colorado bill sets limits on the amount companies can raise, what they must disclose, and how much investors can risk.

Businesses will be able to raise $1 million in a year, although that amount rises to $2 million if they submit audited financial statements to the state. Businesses also will have to provide statements in “plain, nontechnical language” explaining the risks to potential investors and acknowledging the registration does not meet SEC or other state standards. Finally, they will be required to provide quarterly reports that include an analysis of the business operations and financial condition of the issuer and officers’ and directors’ compensation.

The bill does not limit the total amount unaccredited investors can invest in a year, but it does cap the amount they can invest in a single company at $5,000. So, for a company to raise $1 million in a year, it would need to find 200 investors.

The bill also would require the “on-line intermediaries” operating the Web portals matching investors and companies to refrain from giving investment advice or handling funds or securities, and require them to keep records of the transactions.

The bill has to clear both houses before it reaches the governor’s desk, and any of the provisions could be changed and new amendments could be added. But its overall prospects are helped by the fact that Democrats and Republicans have signed on to sponsor the legislation. The bill was introduced in the state House of Representatives and will be heard by the House Business Affairs and Labor Committee. The date for the hearing has not been announced on the Legislature’s website.

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